Digital governance in India is beginning to produce economic impacts that can be measured, particularly for micro, small and medium enterprises (MSMEs) that constitute the backbone of the industrial ecosystem in the country.
“Digitalisation reforms in public administration have substantially boosted MSME productivity, particularly in active digital reforming states” (International Monetary Fund 1). Overall, the results provide further evidence at the microeconomic level for the case of digital governance and its benefit of producing tangible economic results through policy reforms.
The study specifically looks at unincorporated manufacturing firms which are ignored in most formal economic studies despite their enormous contributions. These firms are not registered under the Companies Act and constitute a massive unincorporated segment of MSMEs in India. MSMEs contribute to nearly 35 per cent of manufacturing output, employ 110 million people and contribute to 45 per cent of exports. In view of this, even marginal gains in efficiency can amount to significant impacts on the economy.
IMF economists Somnath Sharma and Kenichi Ueda compared productivity trends across states that implemented a range of digital reforms in public administration institutions between 2010-11 and 2014-15, and their findings indicate that states that adopted more digital systems experienced higher productivity growth, as well as lower variation in productivity across firms. This means that in addition to improving average productivity, the variation among firms also declined, indicating inclusive productivity growth.
Reduction in bureaucratic friction is at the heart of this transformation. Small businesses in India have traditionally been subjected to complex regulatory frameworks that entail multiple approvals, physical paperwork, and discretionary authority by officials. Large firms can navigate these hurdles easily due to sufficient resources, but the whole process is expensive and slow for micro and small enterprises. Digitalisation has helped alleviate this disparity by streamlining procedures and bringing clarity.
Reforms under the wider ease of doing business agenda were a 98-point action plan to which states agreed in 2014. This plan included the tax systems, construction permits, environmental and labour compliances, inspections, dispute resolutions, and single window clearances.
Bringing these processes online, automated approvals, and digital tracking reduced delays and human interface. As a result, the compliance costs were lowered even further, enabling businesses to concentrate on production and growth, instead of focusing on red tape.
One of the most significant benefits of digitalisation has been its reduction of informal costs, also referred to as ‘hidden costs’ of business operations. In an opaque business with many manual processes, there is much latitude for discretion. Digital platforms, on the other hand, present standardized procedures and audit trails, making the system more predictable and fair. The creation of a ‘level playing field’ is expected to enhance smaller firms that lack influence or bargaining power.
On the other hand, the study indicates one important limitation. A microenterprise is highly unlikely to move out of state or expand into other states with better digital infrastructure notwithstanding productivity gains resulting from the provision of digital infrastructure within states.
This implies that not much impact can be demonstrated on cross-state borders due to improvements in productivity in microenterprises. Therefore, although digitalisation enhances productivity in a particular state, it does not lead to a reorganisation of economic activities at the national level.
This finding has policy implications. Digital reforms need to be adopted more uniformly across states in India for the country to fully benefit from its digital reforms. Else, there would be a possibility of perpetuating the differential business environments, thus limiting the productivity gains at the national level. At the same time, it is reinforced that state-level governance matters in economic outcomes.
Overall, the IMF paper offers strong empirical evidence that digitalisation of public administration is not only a governance reform but a powerful economic tool. By reducing compliance burdens, increasing transparency, and streamlining processes, these reforms are enabling MSMEs to become more productive and competitive.
As the digital transformation journey continues in India, wider and more consistent implementation of digitalisation across states could yield greater returns to the economy and its millions of small businesses.
